As the saying goes, if something looks like a duck, swims like a duck, and quacks like a duck … then it probably is a duck.

So even if your worker signs a contractor agreement, they may still be considered an employee under Australian law.

That’s why it’s critical for business owners to understand the difference between contractors and employees. Otherwise, you risk sham-contracting and finding your business on the wrong side of the law.

What’s sham-contracting?

 Sham-contracting typically occurs when companies need workers, but don’t want to give them employee entitlements such as leave and superannuation. As a result, the business may misrepresent an employee as an independent contractor in an effort to avoid their legal obligations

For example, the business may require the worker to have an ABN, sign a sub-contractor agreement and submit invoices as a genuine independent contractor would.

However, under the Fair Work Act 2009, employers cannot:

  • Tell an employee that he or she is an independent contractor
  • Dismiss or threaten to dismiss an employee so they can hire them as an independent contractor
  • Knowingly mislead an employee (or former employee) and persuade them to perform the same (or mostly the same) work as an independent contractor

Employee or independent contractor?

 Under Australian law, employees have different rights and obligations than independent contractors. But how do you tell the difference between the two employment statuses?

Unfortunately, there isn’t a single deciding factor. But, as a general rule, an employee:

  • Works for only one business
  • Has set hours
  • Has little or no control over what work they do

In contrast, an independent contractor is self-employed, so typically:

  • Works for multiple businesses
  • Has no set hours
  • Has full control over what work they do and how they do it

 What’s the penalty for sham-contracting?

The Fair Work Ombudsman ensures compliance with Australia’s labour laws. So the ombudsman can pursue any employers through the courts it thinks are knowingly or recklessly entering into sham-contracting arrangements.

Courts will look at the whole working relationship between the parties when they are deciding if a worker is an employee or an independent contractor.

The maximum penalty for sham-contracting is $13,320 (for individuals) and $66,600 for corporations, per contravention. Employees who have been victims of the practice are entitled to back payment of all their entitlements such as holiday, sick leave and superannuation.

How to avoid sham-contracting

 Sham-contracting is often done deliberately, but it can also be done ‘recklessly’ by an employer. As a result, it’s possible for your business to unwittingly engage in a sham-contracting arrangement, risking substantial penalties and reputational harm.

If your business regularly employs independent contractors on an ongoing basis, it can be a good idea to:

  • Regularly review your arrangements and employment contracts – particularly as a working relationship can change over time from independent contractor to employer
  • Seek legal advice to clarify where you stand

Blaine Hattie is a Commercial Lawyer at Sutton Laurence King Lawyers.

Want a good commercial lawyer in your corner? Call Sutton Laurence King on 03 9070 9810 or email info@slklawyers.com.au